Abstract
Economics students need to be taught that opportunity costs are important for optimal decision making but that sunk costs are not. Why should this be? Presumably these students have been making optimal decisions all their lives, and the concepts should be easy for them. We show that caring about sunk costs can help agents achieve efficient investments in a simple team production environment. Furthermore, the solution we propose is uniquely efficient if the environment is sufficiently complex. Hence, in addition to explaining contract form and ownership (Wiiliamson, 1975; Hart, 1995), studies of the holdup problem may also provide insights into observed behavior in day-to-day bilateral bargaining problems.
Original language | English (US) |
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Pages (from-to) | 106-118 |
Number of pages | 13 |
Journal | Journal of Law, Economics, and Organization |
Volume | 19 |
Issue number | 1 |
DOIs | |
State | Published - Apr 2003 |
Externally published | Yes |
All Science Journal Classification (ASJC) codes
- Economics and Econometrics
- Organizational Behavior and Human Resource Management
- Law